Understanding Position Trading (Versus Swing Trading and Investing)

Understanding Position Trading (Versus Swing Trading and Investing)

Position trading, also called “positional trading”, is a style of trading that differentiates itself from other trading styles based on how long trades are held.

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Position trading involves taking trades that last anywhere from multiple months to several years. Position trades are generally taken in markets like stocks, forex, physical commodities, or bonds. They are usually not taken by retail investors in the options or futures markets, since each of these contracts has an expiry date.

If you are interested in taking trades that last several months or years, this guide is for you. Position trading is the middle ground between swing trading and investing, offering great return potential but requiring less of your time than swing trading.

Position Trading vs. Swing Trading vs. Investing

Position Trading vs. Swing Trading vs. Investing

Position trading, swing trading, and investing are all different styles used in financial markets. The main difference between them is how long trades are held.

Position Trading vs. Swing Trading vs. Investing

Before we get into position trading details, let’s differentiate it from the other types of trading. Here’s a brief overview of each trading style:

Position Trading:

Position trading is a long-term trading strategy in which traders hold positions for an extended period of time, typically several months or even years. Position traders may base their trading decisions on a variety of factors.

Some prefer to use fundamental analysis, such as examining a company’s financial statements, industry trends, and macroeconomic factors. Traders may also look for companies that are growing, or they may base their trading decisions on technical analysis, such as buying stocks in long-term uptrends.

Swing Trading:

Swing trading is a short-term trading strategy in which traders hold positions for a few days to several months. Swing traders typically use technical analysis, such as chart patterns and technical indicators, to identify short-term price movements in the markets. They may also use fundamental analysis to identify stocks that are financially strong.

They aim to capture a portion of a price move. Since stock prices, for example, are always moving, swing traders try to capture some profit and then move on to other opportunities.

Investing:

Investing is a long-term strategy in which investors buy and hold assets for an extended period, often over years or even decades. Investors typically base their decisions on fundamental analysis, looking for companies or assets with solid financials, strong management teams, and long-term growth potential.

They aim to generate long-term capital appreciation and income through the gradual growth of their investments. Investing may also simply involve buying stock index ETFs and holding them to capture the long-term price appreciated. Over the last 100 years the S&P 500, for example, has increased an average of 10.3% per year.

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.” – Warren Buffett

Day Trading:

Day trading is very different from position trading. Day traders attempt to make money from intraday price swings. That means positions are not held overnight, and trades typically last seconds to hours.

Further reading

Position Trading Return Potential

Position Trading Return Potential

Any style of trading can be profitable, but just how profitable depends on your choice of trading strategy as well as your implementation.

There is no set return that position traders make. They can make huge returns each year, or they could lose money. It depends on which stocks they invest in, how the strategy performs, and overall market conditions. In theory, day traders can make the highest returns, because they can compound their money each day. The money they earn one day they can use to trade more the next day.

Swing traders, in theory, could have the next largest returns. Their trades last weeks to months. If profitable, they can then invest their original capital plus the gains into other trades. Day traders and swing traders often employ leverage, while generally position traders and investors do not. This also allows for larger returns (or losses) for these trading styles.

Position traders come next. They are capturing large price movements over many months or years. The compounding occurs less often. That said, they also pay less in commission costs than the shorter-term trading styles, since they are trading less often.

Investors tend to make market average returns. Over time, the stocks they buy are likely to perform like most other stocks. The average stock market index return in the US is about 10% per year.

If an investor makes excellent stock choices, they may be able to achieve returns of 20% or more over the long-run. However, this requires Warren Buffett-like skill – his average return is around 20% over many decades.

If one of the best investors is averaging 20% per year, and the average investor is earning about 10% per year, you can extrapolate what a good position trader, swing trader, or day trader could make.

It’s important to keep in mind that while “good” day traders and swing traders can make more than a position trader or investor, most short-term traders fail and lose money, whereas most longer-term traders and investors tend to make at least modest profits.

It is also easier to utilize more capital with position trading or investing. Hedge funds do it with billions of dollars. Short-term traders can have a hard time deploying millions effectively, or even hundreds of thousands. Therefore, position trading and investing are much more scalable than short-term trading.

Further reading

The Different Position Trading Styles

The Different Position Trading Styles

Position trading can be further broken down into categories based on how traders find their trades and what they are looking for.

  • Technical position traders look at long-term trends, patterns, statistics, and cycles in the economy or the stock market, then make decisions based on that information.
  • Value position traders seek to purchase assets at a low price compared to previous prices or estimated value.
  • Growth position traders concentrate on buying stocks of businesses that are expanding, anticipating that the stock price will increase as the company continues to grow.

These categories don’t only apply to stocks. Position traders may trade stocks, bonds, or currencies. The same concepts apply, except instead of a business the trader may be analyzing countries in the case of a forex position trader.

Further reading

How Much Time Does Position Trading Take?

How Much Time Does Position Trading Take?

Position trading has one big advantage over short-term trading: it doesn’t take much time.

With position trading, trades last many months or years. This means there is often little to do during trades. You do your analysis, make your trade, and then you wait for your analysis/theory to play out over the next year or more. If you have additional capital to use, the same process repeats.

You may need to do research to find several traders per year. Compare this to a day trader, who needs to spend usually at least an hour per day trading. A position trader may only need to spend an hour or two every few months looking at or analyzing the market and/or their positions.

Further reading

Pros and Cons of Position Trading

Pros and Cons of Position Trading

Here is a breakdown of the pros and cons of position trading versus other trading styles:

Pros and Cons of Position Trading

Pros of Position TradingCons of Position Trading
Minimal time commitment to find and manage trades.If the stock market averages 10% per year, a large amount of capital is required to make the gains meaningful in terms of a dollar amount.
Low trading costs and fees due to the long-term nature of the trades.A good position trader will generally make lower returns than a good short-term trader.
Higher chance of success than short-term trading, as short-term trading is generally more difficult and most traders fail at it.
Nearly infinitely scalable. Since the positions are long-term, large volumes of money can be deployed with ease.
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FAQs

FAQs

What are the risks of position trading?

The risks of position trading include market volatility, the possibility of significant drawdowns, and the risk of holding a position for too long (a profit turns into a loss). These risks can be reduced by risk control measures such as using a stop loss order to exit if the price drops more than you are comfortable with.

What are some common strategies used in position trading?

Common strategies used in position trading include fundamental analysis, where traders analyze a company’s financial statements and industry trends; and technical analysis, where traders use charts and technical indicators to identify long-term trends.

How do traders identify position trading opportunities?

Traders may identify potential positions to trade by conducting fundamental analysis, looking for undervalued stocks with strong growth potential, or by using technical analysis to identify long-term trends.

What are some tips for successful position trading?

Some tips for successful position trading include developing a trading plan with clear entry and exit points and using risk management techniques.

What are the benefits of position trading?

The benefits of position trading include reduced stress from not having to monitor the market constantly, steady profits from capturing long-term trends (most short-term traders fail), and the ability to avoid transaction costs associated with frequent trading.

How much capital do I need to position trade?

Assuming you can buy the minimum amount of an investment, such as one share of stock or one micro lot of a currency, then you can position trade. That said, if you have to pay commissions, wait until you have enough capital that the commission is a tiny fraction of the money you are putting into the trade.

For example, it is not advised to buy $100 worth of stock if you have to pay a $10 commission. You are instantly down 10%, which will cut deeply into future returns.

Final Word on Position Trading vs Other Trading Styles

Most people would benefit from taking a longer-term approach when getting involved in the financial markets, such as with position trading or investing. While short-term traders can make higher returns, most end up losing money.

If you decide to position trade, consider what style you like the most. Do you like looking at charts or studying company fundamentals? That will help you narrow down how you want to trade. From there, define your strategy, including how you will position size and when you will enter and exit positions.

Further reading